This time of the year we like to remind business-owners of the many tax-advantages and deductions that are available to them. Many times people start businesses but don’t realize the tax implications until they are hit with big tax liabilities or audits, then it is too late…
The IRS allows all business deductions that are “Ordinary” and “Necessary” for your business.
- Ordinary = common and accepted
- Necessary = helpful to your business
Both of the above requirements can be met with a very low threshold. And the IRS only requires that business expenses be reasonable in nature to be deducted. So anything that assists your business in growing, can be deducted on your business tax return.
To keep track of business expenses, we generally recommend that you have a business banking account and make all business purchases out of that account, either with a check or a debit card. You can download banking and credit card transactions into QuickBooks software to make tracking business expenses much easier.
Some Quick Points about Small Business Taxes:
- Self-employed people list their income and expenses on Schedule C of the 1040 Tax Return
- Sales – Expenses = Taxable Income
- Taxable Income is subject to regular Income Tax and an additional 15.3% Self-Employment Tax
- So it is important to keep track of all business deductions in order to keep tax at a minimum
We also recommend that you never co-mingle business expenses with personal expenses – in other words only pay business expenses out of the business bank account. If you have rental properties, you should have a bank account for each property.
Top Business Tax Deductions
Auto expenses – make sure to keep a log and track all mileage. The IRS generally will disallow deductions without the log. You can get a mileage log at any office supply store.
Auto Expense Notes:
- Can deduct actual expenses (OR) use the standard mileage rate (50 cents per mile for 2010)
- Actual expenses can include: gas, repairs, parking, tolls, insurance, depreciation, registration
- Must have a mileage log or may be disallowed if audited.
Meals & Entertainment – make sure you keep all receipts and/or credit card and bank statements. You should always write down who you met with and what topics were discussed.
Meals & Entertainment
- Are 50% deductible
- Must document business purpose, parties present, name & address of venue
Travel
- Is 100% deductible
- Must document business purpose, place and duration
Rent, utilities and other office expenses – always pay these from your business bank account.
Depreciation:
This is the expensing of a capital asset. In other words, if you purchase a piece of machinery for ,000, you might deduct ,000 a year for five years (or) you might deduct the entire purchase in the first year. Generally, depreciation can result in thousands of dollars of tax savings. Since depreciation is a complicated calculation with many IRS rules to follow, we recommend you meet with us before the end of the year for tax planning so we can help you structure this deduction.
Depreciation Notes:
- Equipment used in the business can be deducted (computers, furniture, fax machine)
- If minimal price (maybe less than 0) can just deduct like normal expense, but if a larger amount, then need to depreciate
- If there is a profit, then can use Sec 179.
Interest – you can borrow money and the interest is deductible. You can also charge purchases and expenses on a corporate credit card, and the finance charges paid are also deductible.
Home Office
- Can deduct a portion of the following: rent, utilities, telephone, insurance, internet access, etc.
- Calculated as a percentage of the total square footage of the home
There are numerous other business deductions which can be taken. Again, the key is to ensure that they are “Ordinary” and “Necessary” as based on a reasonable person’s point of view. We hope that this article helps you to understand what expenses to deduct and how to document those deductions, so that you can reduce your income tax liability and put more money into your family’s pocket.